During the course of discussing Term Life Insurance with clients, there is a question I am asked much more often than one would guess: If I am still living at the end of the Term, haven't I just wasted all that money? I always find it a bit curious that some people view Life Insurance so differently than Auto Insurance or Health Insurance. By definition, Insurance is a contact by which a company agrees to provide financial compensation to a consumer in the event of a loss in exchange for a (relatively) small premium. Most everyone obtains Auto Insurance, not because they are planning on crashing their nice new car, but in the event that an accident does happen, you won't be out tens of thousands of dollars. I've never heard anyone protest that they wasted all that money on auto premiums over 20 years, even if they haven't made a claim because we all know it's a vital necessity to protect us in the event of an accident. If anything, Life Insurance is even more critical. While some families may be able to absorb the cost of a vehicle, there aren't many I know who will be able to replace the hundreds of thousands, maybe even millions the family loses when tragedy results in the death of a family provider.
There are all sorts of fancy formulas which will spit out the amount of Life Insurance one needs. They take into account several factors including age, income, assets/liabilities, number of children, etc. But, when it comes down to it, the decision is really a personal one. I encounter all types in this business, from those who are making minimum wage and attempt to convince the insurance company why they should qualify for a million dollars, to the executive earning $500K who carries less than one times his annual salary because they have enough assets for the surviving spouse to be able to "get by." I usually (not always but usually) find that the very high income earners are the ones most likely to be what I would consider "under-insured". I'm not sure why, but perhaps these folks are earning so much money that they can't even spend it all and provide everything their family could possibly want. Perhaps they are accustomed to having so much that they can't ever imagine going without. This was never more evident as during the 911 tragedy when many of the victims were high powered Financial Executives earning half a million dollars per year while carrying little to no life insurance. Fortunately for their families, the Government stepped in to provide very generously, but for the average family who suffers a loss, this will not be the case. My thoughts are by no means intended to be a sweeping generalization that all higher income individuals carry inadequate amounts of insurance---many do, but rather just observations based on the last 20 years of running a Term Life Insurance brokerage and dealing with those from all walks of life.
It may sound a bit crass, but if we are forced to put a value on our lives, it does come down to how much money we are earning, to some extent. So, when the 35 year old spouse earning $500K is tragically taken away from his family, the obvious first loss is the irreplaceable value of a mother/father--and the fact that no amount of life insurance can bring that person back, but the secondary loss is the financial impact it has on the family and the loss of all the income that individual would have earned and provided to the family over his or her lifetime. In this case, possible more than $10 million dollars. It's not an uplifting issue to address, but the financial piece is a harsh reality.
It's definitely a discussion that needs to occur between spouses to discuss their feelings and personal preferences regarding the tragic scenario of one of them dying. If both spouses work, can the family continue to be supported on the income of just one? Should the family's current standard of living be maintained or would they simply sell assets and adjust to less income? Are they willing to downsize the family home? In the event that one spouse stays at home to provide for children, is this the scenario you want to maintain comfortably or would that spouse simply have to go back to work and have the family situation altered? I am surprised at how many couples seem to be willing to take their chances so to speak, opting for a lower amount of insurance and figure they will just have to adjust to the financial hardship. It's always been my personal opinion that the relatively cheap cost of providing my family with plenty of financial security is well worth it. I always imagined that enduring such a tragedy would bring with it such emotional devastation that having an added financial burden on top of that would only compound the stress. It's one of those situations we all fear and imagine but have a hard time really comprehending the magnitude of, and while money certainly cannot replace a family member, it can provide peace of mind to be able to take time off to love and nurture the family in a time of need.
For those of you who still want that guidance in identifying your "magic number," I will tell you a very lose rule of thumb is 5-10 times your annual salary. This is a fairly big range, and honestly does depend quite a bit on the things aforementioned in the beginning of the blog, as well your personal preferences and desires for your family in the event of your death. I will also add that in the past few years, with everyone's assets dwindling and increase in cost of living, especially college costs, I believe it's necessary to be closer to the 10 times income than 5 if you are wanting to truly replace the value you bring to the family. But, if money is tight and/or you cannot qualify for the lowest rates, then 5 times is certainly better than none at all.
One last thing I will leave you with is an answer to the person who asks me, "What if I outlive the Term"? The first thing I say is CONGRATULATIONS! You are still living and that is a good thing! (Don't feel like you have to die to "get your money's worth"!). And, if your term is a 20 or 30, then you have likely done your job! And, what I mean by that is you have been earning money all those years to pay off your house and other debts, or close to it, your kids are reared and out of the house (hopefully!) and you've survived getting through the most important window of time during which your death would've brought the greatest financial impact. This follows the logic that the amount of insurance that you need decreases over time.
If that shiny Lexus in the driveway deserves and insurance policy, then hopefully your life does too.
Wednesday, May 8, 2013
Thursday, April 18, 2013
The Universal Truth about Cash Value Life Insurance
There has been an age old debate over Term Life Insurance vs. Whole Life Insurance. Having been in the Life Insurance Industry for nearly 20 years, I am asked to explain the difference between the two very often, and am going to reveal some information about Universal Life policies that is not usually disclosed to applicants during the sales process.
I'll start with "Term Life Insurance" as it's a pretty easy thing to explain. Term Life Insurance policies are the cheapest form of life insurance and provide a death benefit of your choosing for a fixed price. The name "Term" comes from the fact that these type of policies are guaranteed for a certain amount of years or "term". The most common policies are 10, 20 and 30 year level Term. With Term policies, the consumer chooses the amount of insurance or death benefit they would like paid to their beneficiaries in the event of their death, AND the length of the policy guarantee or Term. Obviously, the more insurance you want, the more it will cost you. Additionally, the longer the term you want will also cost you more since you are locking in a guaranteed level premium for the duration of the policy, no matter what happens to your health. For example, a very healthy 35 year old male can purchase a 20 year level term in the amount of $500,000 for just $22 per month. As long as the premium is paid continuously, the premium and death benefit are guaranteed for the entire 20 years.
When we discuss "whole life insurance," it should be understood this is a broad term used to apply to different types of policies in the industry. Traditional Whole Life Insurance is guaranteed but usually cost prohibitive to provide as much coverage as the average family needs in the modern day. Universal Life Insurance evolved as a way of providing affordable 'permanent' coverage. Universal Life policies have a cash value account inside the policy that provides an investment aspect. Traditional Universal Life is based on a fixed rate account, and the newer Variable Universal actually provides the options of investing in stock and equity accounts with greater income earning potential. However, listen very closely to what I'm going to say now, because you will not hear this from the agent sitting in your living room trying to sell it to you: Most Universal Life Policies are NOT guaranteed, can actually LOSE money and/or end up with the policies LAPSING even if you pay all of the scheduled premiums. The simple reason for this (again, something NEVER explained by the agents..) is that unlike Term Policies where the "cost of insurance" is the same price for the duration of the policy and why the premium and death benefit are guaranteed, the "cost of insurance" in a Universal Policy increases every single year! You may be wondering how the premium can possibly remain level if the company is contractually charging you more and more each and every year for the insurance? Simple: the premiums to pay this increasing cost of insurance are deducted from the 'investment' account so that the interest that the company claims you are earning, you aren't really 'earning' at all as some or all of your earnings go right back to the company to pay the premium instead of accumulating in your cash account. All of this is buried into illustrations and policy language that is so confusing and complicated that after 20 years in the industry I don't even understand most of it, and have always wondered how they expect the average consumer to. And, it is the reason that even after 10 or 20 years, the 'cash value' of your policy can be less than or perhaps barely more than the total you have paid in premiums, despite being told you had were earning a "guaranteed interest" rate.
When these Universal policies are sold to consumers, the illustrations appears very favorable and show a level premium and impressive cash accumulation over the years. However, please note these are all "projected" and based on assumptions that the company keep all of their costs and charges at a certain level. As a consumer, one should always ask to see the "guaranteed" portion of the illustration, or WORST case scenario with regard the policy performance--this will be buried somewhere in the bottom pages of your illustration. The "guaranteed" illustration usually shows the policy losing all of it's cash value and lapsing within a certain number of years. Perhaps the policy won't perform at the worst case scenario, but that is all the company is contractually guaranteeing, so I guess it becomes of matter of putting your trust into an insurance company going above and beyond their obligation.
One of the founders of our company had a long and illustrious career with a major well known Insurance company, selling these Universal and Variable Universal policies for many years. He believed in what the company said about them and bought them for himself. After a 20 year period of seeing how they ACTUALLY performed vs. what the company PROJECTED they would do, he left the company to found a Term Life Insurance brokerage as he realized how fraudulent these policies were. And the class action lawyers had a field day with all of the big companies, filing suits vs. all of them one by one for deceitful sales practices and false promises.
I'm sure there will be much rebuttal to this blog by the Permanent Life proponents, but if you are a consumer, consider this: As an agent, I'd make a lot more money selling the costly Universal policies which also provide a steady stream of renewals (that we aren't paid with Term Life Insurance policies), so why would I choose to advocate a product that is going to earn me less money? It's because I cashed in all my Universal policies years ago (after losing money!) to buy Term insurance to protect my family as it's the most fiscally responsible decision anyone could make. I simply wouldn't be able to sleep at night if I were selling a product that I'd not buy myself. But, you'd be surprised how many agents do! And, many of them who make a living selling those policies, actually are clients of ours, as they know enough to buy term to protect their own family!
Having said all that, there is one type of Universal policy we do advocate for the right situation and it is the GUARANTEED Universal Life....more to come in another posting, but these types of policies are common for smaller face amounts (since it's tough to afford much more) and feature level premiums to age 100 or 121. You can compare rates of those and other policies from all companies at www.termhouse.com.
I'll start with "Term Life Insurance" as it's a pretty easy thing to explain. Term Life Insurance policies are the cheapest form of life insurance and provide a death benefit of your choosing for a fixed price. The name "Term" comes from the fact that these type of policies are guaranteed for a certain amount of years or "term". The most common policies are 10, 20 and 30 year level Term. With Term policies, the consumer chooses the amount of insurance or death benefit they would like paid to their beneficiaries in the event of their death, AND the length of the policy guarantee or Term. Obviously, the more insurance you want, the more it will cost you. Additionally, the longer the term you want will also cost you more since you are locking in a guaranteed level premium for the duration of the policy, no matter what happens to your health. For example, a very healthy 35 year old male can purchase a 20 year level term in the amount of $500,000 for just $22 per month. As long as the premium is paid continuously, the premium and death benefit are guaranteed for the entire 20 years.
When we discuss "whole life insurance," it should be understood this is a broad term used to apply to different types of policies in the industry. Traditional Whole Life Insurance is guaranteed but usually cost prohibitive to provide as much coverage as the average family needs in the modern day. Universal Life Insurance evolved as a way of providing affordable 'permanent' coverage. Universal Life policies have a cash value account inside the policy that provides an investment aspect. Traditional Universal Life is based on a fixed rate account, and the newer Variable Universal actually provides the options of investing in stock and equity accounts with greater income earning potential. However, listen very closely to what I'm going to say now, because you will not hear this from the agent sitting in your living room trying to sell it to you: Most Universal Life Policies are NOT guaranteed, can actually LOSE money and/or end up with the policies LAPSING even if you pay all of the scheduled premiums. The simple reason for this (again, something NEVER explained by the agents..) is that unlike Term Policies where the "cost of insurance" is the same price for the duration of the policy and why the premium and death benefit are guaranteed, the "cost of insurance" in a Universal Policy increases every single year! You may be wondering how the premium can possibly remain level if the company is contractually charging you more and more each and every year for the insurance? Simple: the premiums to pay this increasing cost of insurance are deducted from the 'investment' account so that the interest that the company claims you are earning, you aren't really 'earning' at all as some or all of your earnings go right back to the company to pay the premium instead of accumulating in your cash account. All of this is buried into illustrations and policy language that is so confusing and complicated that after 20 years in the industry I don't even understand most of it, and have always wondered how they expect the average consumer to. And, it is the reason that even after 10 or 20 years, the 'cash value' of your policy can be less than or perhaps barely more than the total you have paid in premiums, despite being told you had were earning a "guaranteed interest" rate.
When these Universal policies are sold to consumers, the illustrations appears very favorable and show a level premium and impressive cash accumulation over the years. However, please note these are all "projected" and based on assumptions that the company keep all of their costs and charges at a certain level. As a consumer, one should always ask to see the "guaranteed" portion of the illustration, or WORST case scenario with regard the policy performance--this will be buried somewhere in the bottom pages of your illustration. The "guaranteed" illustration usually shows the policy losing all of it's cash value and lapsing within a certain number of years. Perhaps the policy won't perform at the worst case scenario, but that is all the company is contractually guaranteeing, so I guess it becomes of matter of putting your trust into an insurance company going above and beyond their obligation.
One of the founders of our company had a long and illustrious career with a major well known Insurance company, selling these Universal and Variable Universal policies for many years. He believed in what the company said about them and bought them for himself. After a 20 year period of seeing how they ACTUALLY performed vs. what the company PROJECTED they would do, he left the company to found a Term Life Insurance brokerage as he realized how fraudulent these policies were. And the class action lawyers had a field day with all of the big companies, filing suits vs. all of them one by one for deceitful sales practices and false promises.
I'm sure there will be much rebuttal to this blog by the Permanent Life proponents, but if you are a consumer, consider this: As an agent, I'd make a lot more money selling the costly Universal policies which also provide a steady stream of renewals (that we aren't paid with Term Life Insurance policies), so why would I choose to advocate a product that is going to earn me less money? It's because I cashed in all my Universal policies years ago (after losing money!) to buy Term insurance to protect my family as it's the most fiscally responsible decision anyone could make. I simply wouldn't be able to sleep at night if I were selling a product that I'd not buy myself. But, you'd be surprised how many agents do! And, many of them who make a living selling those policies, actually are clients of ours, as they know enough to buy term to protect their own family!
Having said all that, there is one type of Universal policy we do advocate for the right situation and it is the GUARANTEED Universal Life....more to come in another posting, but these types of policies are common for smaller face amounts (since it's tough to afford much more) and feature level premiums to age 100 or 121. You can compare rates of those and other policies from all companies at www.termhouse.com.
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